RISKY BUSINESS

Canada’s aging condos demand financial acumen and far-sighted attention

BY REBECCA MELNYK

TheCanadian Institute of Actuaries’ latest insight statement on the longevity of condo infrastructure explores several emerging risks. “These condos will likely experience very similar issues concurrently since they were built at roughly the same time,” the report states. “If they all experience unexpected issues in parallel, the cost of maintenance will rise across the industry, potentially causing a rift in the condo market.” The demand for labour will likely soar as well.

Henry Chio, FCIA and co-author, who penned the paper alongside Jean-Sébastien Côté and John Nguyen, is calling for more awareness around proper planning. “Condo buildings are complex and a huge asset to manage, and the owners are expected to have that expertise,” he says. “Sometimes that may not be the case, so it’s important to use experts to ensure there is a good understanding of condo operations.”

This newest statement builds off a 2022 research paper on the risks associated with setting and maintaining adequate condo reserve funds, written by Côté and engineer Jon Juffs.

Boards are encouraged to gather advice from various corners of the industry, including qualified professionals who oversee reserve fund studies, governance experts to train boards and financial specialists, including actuaries, who can help estimate future costs. Preventative maintenance is also key for curbing unexpected and reactive maintenance costs.

As well, new legislation is recommended, such as a mandatory board education course that teaches emerging risks. “My personal wish is to have some element to prevent conflict of interest and look at it as a continuing education concept, as well, with a yearly update,” Chio suggests. “Also consider an annual attestation, making sure directors are acting with good conscience.”

While legislation varies from province to province, requirements around reserve fund studies are crucial for strengthening condo infrastructure for the years ahead. Unexpected high inflation can also threaten to boost condo fees.

“We should introduce some stress testing for reserve fund studies,” urges Chio. In the insurance industry, insurance studies are based on large volumes of data to quantify the risk associated with insurance operations. Some of this concept can be borrowed so condo boards see the impact of how much more contribution would be required if inflation were 1 per cent higher for example.

“No matter which method you choose to estimate the expected failure and how much it will cost with the particular element of failure, there is going to be a variance around the point estimate,” he says. “It is important to stress those assumptions and see those parameters shift by a few notches. The reserve fund study is still able to make that result acceptable and that will give a lot more confidence in terms of the level of the fund that the corporation is targeting.”

When studying contribution funds, a longterm, risk-based view is advised, rather than evaluating short-sighted savings that condo owners may see.